That coffee you are drinking might not be so fair trade after all

LIMA, Peru — Are you paying a fair price for your latte every morning?

More than fair, you might think, given the occasional criticisms that Starbucks, the world's most popular specialty coffee retailer, is too expensive.

But try telling that to the farmers in Latin America who grow most of the world's premium java and, in many cases, are not even making ends meet.

Current rock-bottom prices for coffee beans — below cost for many of the region's growers — and a crushing outbreak of coffee leaf rust, a fungus that slashes harvests, are making their lives a misery.

Although the picture is uneven, from the lush fields of Chiapas, in southern Mexico, to the Andean foothills, many growers are caught in the pincer.

The problem is at its most intense in Mexico, Central America and Peru, which together produce roughly 30 million 132-pound sacks a year of arabica, the beans used in top-end coffees.

“It is a disaster. This has just deepened the poverty,” says Eliseo Condor, of Mountain Coffee exporters, which groups together 600 small growers in the Chanchamayo region of central Peru.

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The yellowish fungus eats leaves, causes unripe coffee beans to fall and can kill off swaths of trees. Although the reasons for the latest unprecedented outbreak are unclear, some suspect climate change.

Rust cut Mountain Coffee's 2013 harvest from 30,000 sacks to 22,000. That's despite the company's farmers using fungicide and fertilizer — measures that have increased production costs by 10 percent.

Meanwhile, they are earning an average $175 per sack for their certified organic, fair trade and rainforest-friendly beans, when their breakeven price is $180.

Yet Mountain Coffee's farmers, most of whom have just an acre or two of coffee as their only source of income, may be among the lucky ones.

By growing certified coffee and having annual contracts for most of their harvest with eight regular buyers, in Europe and the United States, they are largely buffered from the worst effects of the coffee crisis.

Through the company, they also have access to expert assistance to deal with the rust blight and improve their productivity.

But for most small growers, that is not the case. Condor says many of his farmers' independent neighbors have seen plants die.

Eduardo Montauban, who heads the Peruvian Chamber of Coffee and Cacao, says up to 30 percent of the country's annual harvest — roughly 1 million sacks — has been lost.

And the ICO says Mexico, Central America and the Caribbean have this year lost a further 2.7 million bags — with the financial hit estimated at more than $1 billion.

A double shot

Meanwhile, the current spot price of around $110 per sack for non-certified arabica does not cover costs for most farmers. For that, Montauban estimates, it would need to hit $130 in the short-term and $160 for long-term sustainability.

The low prices are in part the result of a global glut, including increased production in Brazil and Colombia, according to Mauricio Galindo of the ICO, which supports the global coffee industry and promotes price stability.

Both nations' growers have been hit by low prices but unlike in other parts of Latin America were more proactive in preparing for the rust blight, including even developing hybrid strains of coffee that are more resistant to it.

As a result, Brazil now produces some 50 million sacks a year — although about one-fifth of that is robusta, used for some lower-quality blends and instant coffee — when previously that amount represented a peak harvest.

Meanwhile in Colombia, the biggest exporter of top-end arabicas, production has recovered from recent lows of 7 million sacks a year and in 2013 hit 10 million.

Thanks to their improved production plus higher yields in Vietnam, there's a 10-million-bag global surplus this year and the forecast for 2014 is 4.5 million bags, Galindo says.

The picture is further complicated by growing global demand, especially from new markets such as China and India. Meanwhile, even the mature US market has grown 3 percent over the last year.

But that growing demand hasn't been strong enough to keep prices from sinking.

Coffee is a notorious boom-and-bust crop. The last bad crisis hit when Vietnam burst on the bean scene in the 1990s, flooding the market with cheap robustas and thrusting many Latin American growers into poverty.

That situation helped propel the “fair trade” movement and prompted Starbucks to start its own good-practices system.

According to Galindo, around just 10 percent of the cost of a cup in a cafe or restaurant in Europe or the US is for the beans, with the rest being spent on other overhead such as rent or labor.

That means paying growers, say, 30 percent more could translate to roughly a 3 percent increase in the price for the consumer — assuming roasters and other middlemen in the import-export process agreed to pass on the revenues.

Yet in competitive markets, even such a small rise could lose customers.

“It is tricky. On the one hand you would like to pass on more money to the farmers but on the other you don't want to harm demand,” Galindo says.

Montauban adds: “It is not about whether the prices are fair or not. This is a commodity and those are the prices that the market sets.”

As for Starbucks, the company buys directly from growers, mainly smallholders in Latin America, and stresses that it pays them above-market rates while providing technical support, including farmer support centers which offer services such as soil analysis.

Although the company won't divulge pricing information, a Starbucks spokesman said the idea of charging customers more in order to pass the proceeds onto farmers was “provocative and interesting.”

For Condor though, the issue is whether Mountain Coffee can even sell everything it currently produces, with many buyers concerned about rust's effect on quality of the beans that are harvested

This year, the company was forced to sell a quarter of its certified beans at much lower non-certified rates, he says.

“We don't even know if anyone will want to buy our organic coffee next year,” he adds. “This is no way to run a business.”